Will infrastructure be the next big tech category?

0:00Mike Butcher:Welcome to Path Founders, the new tech media title covering the entrepreneurs who code, the capital that backs them and the consequences. I'm Mike Butcher, the editor. Please do like and subscribe, as the phrase goes, so we can continue to bring you this journalism. Europe is facing a six trillion euro infrastructure transformation over the next decade. Energy grids designed for a pre-AI world are being pushed to their limits, while water systems are under pressure from climate volatility. And as we all know, Europe's defense systems are under massive pressure for obvious reasons. And now, with Iran reportedly threatening to fire drones at Ukraine, an intelligence warning suggesting Russia could invade NATO territory sometime before 2029, nine, abstract phrases like European resilience are becoming less abstract by the second.

0:58Mike Butcher:But for the last two decades, the tech industry has been optimised around speed, fast software, fast scaling, fast exits. So in the defence and resilience debate, have we missed what we think of as mundane energy systems, data centres, supply chains, logistics networks in the grid. What can venture capital and tech entrepreneurs do in these arenas? Joining me now to discuss this is Nicholas Zamios, partner at Berlin-based venture capital firm PTE1. Welcome to Path Founders, Nicholas. Hi, Mike. Pleasure to be with you. Obviously, from a high level, it seems like an insurmountable mountain to climb when you think about things like energy and infrastructure, when there's so much vibe coding around these days and it seems like low-hanging fruit for tech entrepreneurs.

1:49Mike Butcher:But there is quite clearly some big opportunities here, isn't there? Absolutely, absolutely. I think already in the intro you gave the astronomical figures of money that needs to be invested just in Europe in the infrastructure, hardening of the build will, the electrification and so on and so forth. And all the numbers you said were already true like two weeks ago, right? And now with the Iran escalation, I think we even see every day that it's accelerating. So, you know, I prepared like five minutes for the call. And just like one simple example is the energy prices in Europe. Unfortunately, UK is missing because you left the club temporarily.

2:30Let's see. But the obvious thing is, for example, that Spain is doing quite good because they heavily invested in renewables. So their price is whatever, 26 euros per megawatt. So Germany is somewhere like 80-something. The Nordic country is very good because they have a lot of renewables. So the obvious thing is that a lot of the stories we've been discussing over the last decade, let's say, under a green transformation headline are still true under a resilient supply chain strategic independence headline. And this is why I think that not everything is brand new that we need to discuss if we talk resilience tech, infratech.

3:09A lot of these things you will already know, but it's now looked at from a different angle, more from an affordability, price point, supply chain risk perspective, which I think is good news because the likeliness that this goes mainstream, that it attracts also the largest conservative investors and also conservative governments backing it is even higher than if you just phrase it under impact, CO2 emission, whatever environmentalist costs.

3:38Mike Butcher:Yeah, I think so. And it also becomes effectively a national security issue, doesn't it? And I mean, some of us joke in the tech industry about the rebranding of climate and impact to be the word resilience. But it is true. And the figures that you just mentioned about the cost of renewables coming out, for instance, Spain, which has a lot of solar, of course, you know, it's unarguable, isn't it? it's just cheaper yes it's also better for the environment which is fantastic and that will help with things like climate volatility but um it's totally unarguable and i think there's some very interesting research which i uh have looked into um along these lines europe has a six trillion euro infrastructure coming down the pipe two trillion euros is already committed but that leaves 4 trillion euros to be got to suck from somewhere.

4:36Mike Butcher:And it's going to probably most of it's going to have to come from private equity and private capital. So how do you think venture capital can move into this space? You know, how quickly can it and often it's about how fast it can do it? Is it about fiddling around the edges, you know, optimizing systems with software? What other things can it do? Yeah, let's try to digest that a little bit. So first of all, starting with the big numbers you gave, this is pretty much the European Union Commission projection that's already there. That's conservative numbers, I'd say. And yes, not everything there is connected to, let's say, the venture capital startup ecosystem.

5:19A lot of that is the asset class of infrastructure per se is investing in the grid, in bridges, in rail networks and so forth. There are large investors out there that do that as a living. So the largest funds on the planet are not venture funds, unfortunately, right? Or maybe that's also good news. But these large investors, let's say like an Aviva from UK or Allianz from Germany or whatever, or partners group, whatever, They regularly invest in these asset classes. And now the question is, in a way, if you invest, let's say, 5 billion euros or pounds, doesn't matter, in infra, does it make sense to also invest 100 million in infra tech?

5:59That's the point. And I think there is a very good argument for that. Because obviously, kind of making that universe investable, optimizing yields, reducing risk, really understanding where are the low-hanging fruits, that's a data question. Right. So therefore, having clever software, first of all, that helps you analyzing the low hanging fruits, helps you optimizing the return on investment. That seems an obvious thing, right? The second part of the story, I'd say, is the like the hardware, the physical AI, kind of the hybrid thing. Just just a simple example. The best drone company on planet Earth where you can buy beautiful drones for low prices, DGI.

6:45unfortunately a Chinese company, right? So if you run a high-security, critical infrastructure, high-power voltage line network or gas pipelines or something, either you're already not allowed to fly a DGI drone over that infrastructure or you don't want to for the obvious reasons, right? So we need European companies building that technology and also controlling it, yeah? Speaking of the cloud, where the data is, and so on and so forth. So in a way, at the end of the day, if you look at it, everybody in venture seems to raise a defense tech fund currently. But potentially, the much larger market is like the interior part.

7:27So defense like being the outer front. With the numbers you said, there's so much space. There's so much tech to be developed. So both for founders and investors potentially looking inwards, I mean, all of Europe seems maybe a good place to be for the next couple of years.

7:45Mike Butcher:Right. And clearly there's a sort of dual use application there. And I know that, for instance, there's a vehicle Lightspeed, which invested in a drone company that doesn't use any parts at all from China and it has a totally resilient supply chain for its drones. But that dual-use defense debate, you know, sometimes it's a bit of a yin and yang. And we know that NATO countries are moving towards about 5 % of GDP on defense. The question is, is like, where do you include infrastructure in the defense debate? You know, that's a very interesting issue, isn't it? Mike, already starting with your 5%, if you look kind of below the headlines, NATO defines that as 3.5 % core defense kind of weapon technology and 1.5 % infrastructure.

8:44The remaining stuff, because basically, if you need more soldiers and whatever, you need to train them, you need barracks, you need roads, you need, for example, pipelines for kerosene or whatever. again there right in exactly the same topic that i just said so the same drone that controls high power lines also controls um oil and gas pipelines if that's now like uh like just a commercial enterprise running the pipeline or nato well the drone doesn't care obviously right yes you have to look in your framework if you're okay with um dual use defense whatever for regulated reasons But the technology is pretty much the same.

9:25So already NATO in itself is defining that investment universe kind of next to core defense. So therefore, there is the obvious market.

9:37Mike Butcher:And do you see entities like the NATO Innovation Fund looking at infrastructure? Yes and no. So I think that currently the hot topic is the defense, the outer park. and a lot of people are rushing in to raise new funds and doing startups there. I'm absolutely not against that. So we definitely need that for a hardened Europe. But you know, it's a very specific, a very special market. So if you as an investor or an operator, it doesn't matter, if you've done good business in e-commerce, B2B, ZaaS, whatever, the procurement for a weapon system looks completely different, unfortunately. So you have to be an expert how that really works.

10:18So therefore, yes, a handful of good funds will be there. Fine. It's not us. Right. So we decided we've been like an expert for, let's say, the broader build world, electrification infrastructure stuff since whatever, 2018. So we stay in that lane. Right. But again, we're not naive. We've never been the super impact, impact, impact guys. So therefore also dual use was never a problem for us. Right. So we just look at the pain points. We look where the money goes, simplified, right, where European Union or also the British government. is setting the priorities. And along these lines, there will be an investment universe.

10:53So again, good space to be for both founders and investors.

10:57Mike Butcher:And the debate is around infrastructure is really interesting because it's terribly wide. And I noticed that you produced a very good report about this. And one of the stats that jumped out at me was that construction productivity hasn't improved since 1995 and Europe faces a 2 million worker shortage by 2030 and 45 percent of these construction workers are due to retire anytime soon. So what are we going to do? It's quite amazing, isn't it? And that issue around, you know, construction and infrastructure and automation and things like robotics, they're all totally intertwined, aren't they? Absolutely.

11:41So this is the universe where you can put the headline physical AI on top, right? And also even the most aggressive US guys like Elon Musk or the NVIDIA CEO, et cetera, see that this is a topic for Europe. This is exactly as close to the DNA we have here, the experience, the universes, the machinery, engineering companies, etc. And yes, Europe has, for the very reason that we're running out of workforce, Europe has to upgrade, not just resilience, but also productivity, first of all, to build these things, right? So therefore, again, this is something that is maybe also not just a topic where a standalone startup in a co-working space somewhere can develop something because they have to connect to the physical world literally, they have to work together with kind of the existing industry, the German Mittelstand as a cliche or whatever the hidden champions and so on and so forth.

12:41But also that that's also a good thing. It's also a good source of capital, by the way, right? So if you're a startup in that domain, it's not just raising money from VC funds, it's potentially also raising money from these large family owned businesses from the industry, you have to be clever, you have to mitigate the problems if you have strategic investors, yada, yada, yada, of course, right. But there's really an interesting ecosystem here and i think also again maybe maybe coming back to like the green movement we had a couple of years ago you know a lot of also the industry leaders the family owned businesses in europe etc yes some of them had an intrinsic motivation to go impact impact impact but a lot were like conservatives right so so they were not so activated by that now if they if they hear the warning message that you already said, right, Russia might attack by whatever, 2030, right?

13:31We don't know. This is something where I think everybody can and needs to come together to activate that spirit that Europe needs to step up. Otherwise, on a global scale, we'd just be crushed between, let's say, West and East. And so this is something that really I think everybody, every business owner, old or young, can relate to. So I think that's the special situation we're in, Combi.

13:56Mike Butcher:Yeah, it's fascinating. Interesting that you highlight how green millennials could unite with neoconservatives almost on investment, on resilience, perhaps. But, I mean, sort of also looking at it, I mean, you know, there's some real opportunities, isn't there? I mean, if you lay a brick with a robot, it's a lot cheaper than with a human. But there's going to be a real gap between what we have right now and buildings being built by robots, right? Absolutely. So I think the picture that you have a human-looking robot on a construction site, on a scaffolding in the seventh floor or something, that's wrong.

14:43That'll take, I don't know, 20 years. But the thing that really increases productivity is simplified. If you look at a car factory today, it mustn't even be a Tesla plant, but look at a Tesla plant, look at a Toyota plant, look at a BMW plant. There you have like long production lines where you have industrial robots working on the different components, right? So the number of human beings is reduced. A lot of stuff is automized. That increased productivity in automotive year after year over the last decades. that productivity gain wasn't applied to construction. So the first step is not to have robots on a dirty construction site in the rain somewhere for all the given reasons.

15:28It's to pre-produce like elements in a more industrial setting, put them on a standard lorry, drive them to the construction site, right? And do like Duplo blocks instead of Lego blocks before. That's the first thing. You gain tons of productivity, right? You can hit price points that we need because let's say another aspect is, as you know, all European cities have a problem with affordable housing. So we need to reduce price points for new build. We need to renovate stuff. It would be nice if the building stock wouldn't consume whatever 20, 30 percent of oil and gas for all the obvious reasons.

16:03Right. So already today, the International Energy Association is issuing another white paper. We're running into the next oil crisis. Right. So I don't want to be alarmistic, but the story we're currently in, the problem we're currently in won't go away one week down the road if potentially Trump, etc. goes out of Iran. The damage that has been done is substantial. So we will have reduced kind of fuel and gas availability and some other things like fertilizer and helium and whatever. And the price points will be higher for a couple of years at least already right now. So therefore, everything that was in the room before and was right and a good idea will be a right idea squared right now.

16:50Mike Butcher:Right. Yeah. And it's not an exciting prospect to look forward to. Do you think that all of the geopolitics and the machinations that are going on right now are going to fast forward investment into more resilient technologies? And do you think that's going to be able to mitigate some of the downsides that we're facing? Well, there is no alternative, so I'd say yes. And the question is just how high does the pain level need to rise until societies, politicians, governments, etc. really go for the fastest way from A to B, right? So I'm a techie guy. I'm not an environmentalist. I'm not in any party, etc.

17:38So for me, the question is, if we need to, let's say, reduce dependencies, reduce price points, optimize productivity, what's technically the best way from A to B? No discussion about it. Unfortunately, we're living in democracies. So there is a lot of campaigning about that. There's a lot of culture war about that. Right. So so therefore, it doesn't go like directly from there, but it goes from there to there. Right. But as the pressure rises, as the price points rise, as scarcity rises sooner or later. Right. All the governments, even the most conservative ones need to adapt a pretty optimal route to transformation.

18:18So therefore, this is, unfortunately, I'd say the largest mega trend you can bet on, either as an investor or as a startup. And by the way, we haven't even mentioned climate change. Climate change isn't a way. We're just so busy that we can't talk about it. So therefore, investments, both public and private investments, will intensify. And as always, the people that are clever, that are on the first train in a way, they can benefit from that. The longer you wait, then potentially you're left behind a little bit. But I think this is the clearest investment opportunity you can put your money on.

19:00Mike Butcher:Yes, well,€6 trillion is a lot of money, let's be honest. as Europe has to reinvigorate all of its infrastructure in the next few years. But in the same way that we've seen in defence, that defence tech has now given rise to neo-primes. So there were defence primes like Lockheed, Raytheon, etc. Now there's neo-defence primes like Anduril and Helsing in Europe. Do you think we'll see Neo primes in infrastructure? So, you know, prior to this, we've had, you know, Siemens or Airbus or Vinci. Do you think we'll see Neo primes now in infrastructure? I think potentially, potentially it won't be so concentrated.

19:50So for a lot of good reasons, we just have one Airbus as a pan-European setup, right? So doing like five wouldn't just make any sense. So I think like in energy construction infrastructure, it's a bit more decentralized. So it will be a couple of more players. But will we see like unicorns, decacorns or whatever in that space? Yes, absolutely. Can we potentially identify the first couple in this space? I would also say yes. Right. Potentially, we already have one or two of these candidates in our portfolio. Right. So knock on wood. Too early to tell. But yes, for example, so think about, let's take batteries, just one part of the story, right?

20:32Battery storage makes total sense because speaking of resilience, you can do an oil and gas stockpile. Currently, we're discussing that. How much is left? How many days left do we have? Is there a pp? So kind of how you store electricity. And for the long and midterm, the problem has been solved technically, in a way, thanks to the Chinese, right? so so so irony um so batteries are readily available it's not long high-tech you can it's bankable technology that's the relevant part so we can scale up we can roll out stuff so one of our companies raised like billion follow-on financing from infra investors and banks to scale up batteries grid scale right so if we if we do that the short term also this fluctuation in in the grid that's solvable we need another technology potentially for longer term storage could be hydrogen there are some other things i'm also bullish on geothermal energy for example but if you just take the energy thing there there there's a universe there right there there's stuff that's already mature but there will be new technology all the time right so you can always enter the space as a clever entrepreneur with a new deer it's it's not done yet right and that's just the energy thing right then we can talk mobility then we can talk build world we can talk perimeter security cyber defense by the way could also be a problem right you can use ai for a lot of good things but you can also use it for a lot of bad things right so you need to protect the systems against yeah the potential kind of increase yeah in in attack both in the cyber world and in

22:04Mike Butcher:the physical world right yeah and it's yeah it's it's it's a big subject but it's it does benefit us to drill down into the kind of specifics about how an entrepreneur might engage with this I mean, it's a fascinating subject, infrastructure as a thesis, especially for venture capital and for entrepreneurs. And I'm sure we'll be returning to it again in the future. But for now, that's all we've got time for. But thanks so much for joining Path Founders. Nicholas Samios partnered with Berlin-based VC PT1.

22:47Thank you.